Budget Review 2015 - 2016Who knew Hong Kong was flush? It turns out that Financial Secretary John Tsang underestimated the budget surplus for 2014-15 by over $60 billion. Whether or not that surplus lasts is anyone’s guess though. In February’s budget announcement, Tsang vowed to increase social services for an aging population and find a way to help the middle class buy homes and still lower salaries and profits taxes by 75 percent (now capped at $20,000). As Tsang stated, 2014 was an extraordinary year, one where, “Momentous events, local and global, changed the lives of many and transformed our city … A totally different environment has emerged, which presents new challenges ahead.” Tsang recognised (mostly) the impact the Occupy protests did in fact have, and created a budget to address some of the issues brought to light because of it and somehow kept his eyes on the bigger economic picture. “Prolonged bickering will only bog down our development.” Spank.

Cash in Pocket
Tsang introduced a number of programmes designed to put money back into the hands of taxpayers, chief among them child allowances jumping to $100,000 from $70,000 and extra payments to those on comprehensive social security and old age living and disability allowances — a first since the banking meltdown in 2008. On the business front, the government is pouring nearly $1 billion into the creative industries to help diminish Hong Kong’s image as a cultural wasteland, and $200 million for youth internship programmes across Asia. Altogether, the $34 billion worth of relief measures — including relief to tourism-related businesses that suffered during Occupy — are designed to stimulate consumption, stabilise the economy and save jobs. Tsang pegged the SAR’s GDP for 2015 at 1 to 3 percent.

Tsang also pledged plenty of support for the traditional industries — banking, finance, technology, logistics and cross-border services among others — as well as promises to infuse money into doing it sustainably (like incentives to use low sulphur fuels in port and electric vehicles). But the $64,000 question remained the one of how to help with housing. To that end the Hong Kong Mortgage Corporation (HKMC) will be giving loans to Home Ownership Scheme (HOS) owners to help pay premiums should they want to sell or lease out their property. Officially, “To promote market circulation of subsidised housing, HKMC will consider launching a new Premium Loan Guarantee Scheme to help owners of subsidised sale flats pay the premium to HKHA or HKHS. After settling the premium payment, owners will have greater flexibility in disposing of their flats, such as letting out or selling the flats in the open market.” The idea is to create a larger residential supply by alleviating the burden of premiums.

Impact Vector

It sounds like a respectable idea on paper, but Joseph Tsang, managing director at Jones Lang LaSalle, doesn’t think the scheme will work. In addition, “The flat-owners enjoyed a discount on property prices when they bought the subsidised housing. It is unfair that they could enjoy another benefit. The scheme [will] encourage property speculation and investment,” he stated. Joanne Lee, manager of research and advisory at Colliers International agreed. “Settling the premium payment allows greater flexibility in flat disposals and I don’t think the interest rate scheme will attract a lot of market interest.” However, Lee’s partner at Colliers isn’t so quick to brush it off. “The idea is good but the anticipated increase of liquidity in the sales and leasing market resulting from the Scheme might not be too strong in the near term, as most property owners would prefer to wait and see until market prices (as the benchmark for land premium) come down a bit,” argued Simon Lo, executive director of research and advisory for Asia.

Cooler Still

Much of that raises the spectre of further cooling measures in a year when mass property prices are predicted to continue their upward trajectory, anywhere from another 5 to 10 percent. “I will not hesitate to introduce measures when necessary, in order to maintain the healthy and stable development of the property market and safeguard the stability of our macroeconomic and financial systems,” the Secretary warned. Should we expect more market management this year?

In short? Yes. “This is the question … of when will prices become ‘unhealthy.’ My gut feel is no more than the percentage rise we saw last year — 13 percent. Year-to-date growth in less than two months was nearly 4 percent,” reasoned Lo. “Timing-wise, in the second half of the year it will be very likely. Curbing the price rise of mass residential units valued at $6 million or below, the Government might possibly revise the stamp duty rates upward to the same level of 6 percent, in my view,” he theorised. On this Lo and Lee agree. To Lee’s mind, the government will cool the property sector in order to protect the banks. “If property prices continue to grow by another 10 to 15 percent in the next few months, there’s a likelihood that the government will introduce a new round of tightening measures, particularly [for] small-to-medium sized units,” she finished.

What a difference a day or two makes. Shortly after Lee and Lo made their predictions, Hong Kong Monetary Authority Chief Executive Norman Chan capped mortgage ratios for residential properties under $7 million at 60 percent. The net result being bigger down payments for prospective buyers protects both the banks and first time buyers Chan argued. JLL’s Head of Research, Denis Ma, quickly commented, “These new measures are likely to dampen sentiment and put pressure on prices over the short-term but a sharp correction is unlikely given the strong underlying fundamentals in the market: pent-up demand via sturdy household formation, robust labour market and steady household income growth.” Noting the HKMA also reduced the maximum debt-servicing ratio to 40 percent for second home end-users, Ma estimated the impact will be felt most in the primary market, as the incentive to sell remains low. Looks like the choice to wait and see just evaporated.